Tax-Smart Giving with Qualified Charitable Distributions

Thinking about making a large financial gift to charity? Looking for ways to reduce your taxes? If you’re retired and have IRA assets, the qualified charitable donation (QCD) tax rule might work in your favor. The QCD rule allows IRA owners or those who have inherited an IRA to exempt their required minimum distributions (RMDs) from taxation through direct charitable giving. It’s especially pertinent given recent tighter rules on itemized deductions. Here’s what you need to know to benefit from QCDs.

Who qualifies to make QCDs

The age requirements for RMDs and QCDs are similar, but not the same. IRA owners become eligible for RMDs any time during the year in which they turn 72 years old. For the QCD rule to be in effect, you must have reached 70½ years of age. It’s a slight distinction that matters when you want to reap the QCD tax benefit in your first year of eligibility.

Meeting RMD rules with a QCD

RMDs can often be seen an annoyance, especially when you don’t need the money from your IRA. Yet failing to take RMDs is a costly mistake. The IRS imposes heavy fines on taxpayers who skip this annual obligation. If you can get by without taking income from your IRA, you might want to consider doing good with the dollars you are required to withdraw. That’s where the QCD can do double duty. The IRS states, “your qualified charitable distribution can satisfy all or part of the amount of your required minimum distribution from your IRA.”1

Eligible amounts

The QCD rule applies to IRA distributions of up to $100,000 annually. The limit applies to the IRA owner and not a household. This means your spouse can also donate up to $100,000 (from his or her own IRA) through a QCD in the same year.

Timing matters

The IRS applies the “first dollars out” rule to RMDs from your IRA. That means whatever is withdrawn first from your IRA during the tax year goes toward satisfying the RMD. If you make a withdrawal as income earlier in the year, the withdrawal will reduce tax exemption under the QCD rule. To get the maximum tax benefit, make your QCD early in the year, before withdrawing funds for any other purpose.

Who can receive QCDs

Choose your charity carefully. QCDs only apply to charities granted tax-exempt status by the IRS. This generally includes nonprofit groups such as churches, charities and other 501(c)(3) organizations. When in doubt, visit the IRS online tool to confirm nonprofit status.2

Eligible IRAs

You can make a QCD from either a traditional or Roth IRA. However, the tax benefit associated with the QCD rule only applies to owners of traditional IRAs since withdrawals from Roth IRAs are not taxable. Savings held in an employer-sponsored retirement account are not eligible; consider an IRA rollover if you want to take advantage of the QCD rule in the future.

Tell your tax preparer

It’s important to properly report your QCD at tax time. Under certain circumstances, the IRS may require an extra form.

Plan ahead

Talk to your financial advisor at or before the beginning of the tax year if you wish to satisfy RMD rules with charitable giving. Consult your tax professional to ensure compliance with both RMD and QCD rules.

1 https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

2 https://www.irs.gov/charities-non-profits/tax-exempt-organization-search

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Andrew R. Petty, CRPC®, APMA®, is a Private Wealth Advisor with Marlowe, Petty & Associates, a private wealth advisory practice of Ameriprise Financial Services, Inc .  He offers fee-based financial planning and asset management strategies and has been in practice for 16 years. To contact him, please call 407-249-4006, visit his website at www.marlowepetty.com or stopover at his office at 10917 Dylan Loren Circle, Suite A, Orlando, FL 32825.

Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.

Ameriprise Financial Services, Inc. Member FINRA and SIPC.

© 2020 Ameriprise Financial, Inc. All rights reserved.

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